The declining role of coal

In 1955 Winston Churchill rumbled “I have not become the Queen’s First Minister to preside over the liquidation of the British Empire”. History tells us that in the following decades the winds of change blew long and strong, transforming the old Empire into the new Commonwealth of Nations.

In 2010 one of the first statements made by Greg Combet, newly appointed Minister for Climate Change was to assure the coal industry and its workforce that they had nothing to worry about where profits and jobs were concerned. History will show that the imperative of placing a price on carbon began the decline of the fossil fuel industries in Australia.

Most Australians accept that production and use of fossil fuels in general and coal in particular are responsible for greenhouse gas emissions, the prime cause of global warming. They know that sooner or later a price must be placed on those emissions, popularly referred to as “carbon”, to reduce emissions and help curb global warming. What comes as a surprise to many is the call by both the mining and power generating industries for carbon to be priced.

Why should the industries most responsible for greenhouse gas emissions be calling for a price to be put on those emissions? It seems so counterintuitive - but when you come to think about it, it makes sense.

The coal mining industry knows that it can’t undertake its activities without emitting greenhouse gases, mostly methane. It knows that a price on carbon will add to its production costs but, it also knows that in the absence of a cheaper alternative to coal, it can pass-on all of those extra costs to its customers. Since there is no cheaper alternative to coal, introduction of a carbon tax is not going to affect their profits.

However, Federal Government has made it clear that from now on new coal-fired power stations must emit lower levels of carbon. They must also be able to capture and securely bury their emissions when carbon capture and sequestration (CCS) technology is commercially available.

Power station owners have had plenty of warning of this, so it comes as no surprise. Like the coal miming industry, they too can pass-on this additional cost to their customers - industry, the public sector and households, in short everyone who uses electricity. Because those customers are so numerous, an increase in the cost of electricity for any one customer is most unlikely to prove so great that they feel forced to stop using it.

Australia is a prosperous country, its economy is growing and so is the demand for electricity. Demand is so great that existing power stations are barely able to supply it and the need for additional power stations generating additional electricity is now quite pressing. The problem for those willing to build and operate new coal-fired power stations is that government requires them to have lower emissions and ultimately none by using CCS technology.

This adds to the capital cost of building a power station. It also means that new power stations have to compete with existing ones that are exempt from these requirements. Those wanting to build new power stations cry foul, pointing out that this gives existing, old power stations (the worst polluters) with their much lower capital cost, a competitive advantage. Moreover, this makes it very difficult to attract, let alone service, the loans needed to build new coal-fired power stations.

In short, proponents of new power stations are calling for a price to be placed on carbon because they see this as a mechanism that will level up the playing field by placing an additional cost on old power station operators - a cost which their new, more efficient power stations will be burdened with to a far less extent.

This would make the cost of electricity generated by old and new power stations more competitive. Indeed, the higher the price of carbon, the greater the advantage for new cleaner power stations, making it easier for them to attract and service capital needed to build them and earn income needed for maintenance and upgrade.

Conversely, a price on carbon increases the difficulty of attracting capital to build the 12 coal burning power stations, some of them highly polluting, approved before new government requirements were announced. Proponents of power stations that are subject to the new requirements could not be happier with the prospect of a price on carbon - except for one thing. It makes new, less polluting power stations more capital intensive and more expensive to operate because the cost of coal also increases when a price is put on carbon.